Yahoo Revenue, Profit Falls In Q3

Yahoo may have changed leadership with the ouster of CEO Carol Bartz, but its turnaround will not be as swift, judging by its third-quarter earnings released Tuesday. Net revenue for the struggling Web portal fell 5% from a year ago to $1.07 billion on softening in both its display ad and search businesses. Gross revenue of $1.22 billion was down 24% from a year earlier.

The company's quarterly profit fell 26% to $237 million -- or 23 cents per diluted share -- from $396 million, or 29 cents a share, in the year-earlier period. That beat Wall Street analysts’ consensus expectation of 17 cents per share. Net revenue was in line with analyst forecasts.

Following Bartz’s firing in September, the Yahoo board announced it was undertaking a “comprehensive strategic review” to determine the company’s future course. It has since retained investment banking firm Allen & Co. to assist in that process. The moves have prompted wide speculation that the board is considering options from divesting assets -- including its lucrative stakes in China-based Alibaba Group and Yahoo Japan -- to an outright sale of the whole company.

Rumored potential buyers have ranged from private equity firms to Alibaba itself, in which Yahoo has a 40% stake. Tim Armstrong is also reportedly pushing for a merger with Yahoo that would reduces costs and improve the prospects for both companies. During an earnings conference call Tuesday, interim Yahoo CEO Tim Morse only reiterated that the board is looking at the “full range of options available,” declining to comment on any further on the topic. “When the board has something to announce, it will do so,” he said.

Yahoo’s latest quarterly results could fuel investor hopes of a sale or other major transaction to improve the company’s fortunes. After posting weak second-quarter growth of 10%, the company’s display ad revenue was roughly flat in the third quarter, at $449 million, excluding fees paid to partners. Analysts had expected growth of about 4%.

Morse said premium ad sales increased during the quarter from a year earlier, driven partly by a 9% gain in page views. A report last week from Macquarie Research suggested a lift in home page ad sales in the third quarter may have been aided by discounting of ad rates.

Morse declined to comment about the use of pricing cutbacks to boost ad sales during the conference call. But he noted that “non-premium” or remnant ad sales on the site dropped because of lower impressions and yield.

Yahoo had attributed the second-quarter slowdown in display sales in part to a broad sales force reorganization that had a negative impact on sales due to higher-than-expected turnover. The effects of the sales overhaul were expected to last through at least the third quarter. On Tuesday, Morse said headcount had stabilized and the company continues to hire sales staff aggressively.

Yahoo’s search business also continues to struggle. Third-quarter search revenue fell 13% from a year ago to $374 million, about the same total as in the prior quarter. Yahoo’s search partnership with Microsoft so far has failed to pose a serious threat to Google’s dominance as revenue per search (RPS) through their alliance remains below expected levels.

In the first quarter, Yahoo delayed the international rollout of the companies’ combined-search effort because of problems with the performance of Microsoft’s AdCenter platform. Through ongoing enhancements, Morse said RPS continued to improve in the third quarter. Microsoft has also agreed to extend its revenue guarantee to Yahoo in the U.S. and Canada during the transition by a year to March 2013.

“Both companies remain fully committed to the success of our search alliance, and the RPS guarantee extension represents an important sign of that commitment,” said Morse.

He added Yahoo has completed the transition of organic search to Microsoft's system in 40 markets worldwide, with the switch-over to wrap up by next month. The transition to paid search was completed in India during the quarter, with more countries to be added in 2012.

Highlighting the challenges of the Yahoo-Microsoft alliance, Google last week reported another blowout third quarter. The Internet giant saw a 33% jump in revenue, driven by growth in its core search business. Paid-search clicks were up 28% from a year ago.

Google also maintains a huge advantage over its rivals in search query volume, with 65.3% share of queries as of September, compared to 15.9% for Yahoo and 14.6% for Bing. And while Google’s share increased from 64.8% in August, Yahoo’s was flat from the prior month.

Looking ahead to the fourth quarter, Yahoo projects net income to be in the range of $1.125 billion to $1.235 billion. The increase from the third quarter would reflect a typical seasonal bump of the kind Yahoo has seen over the last of years, said Morse. After closing at $15.47 Tuesday, Yahoo's stock price was up about 2% in after-hours trading.

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